The economy could be growing as fast as 4.5% thanks to construction, tourism and retailing booms in Auckland, but high levels of lower skilled migration into Auckland appear to be dampening wage growth there and adding to deflationary pressures, a business confidence survey shows.

Yesterday's NZIER Quarterly Survey of Business Opinion (QSBO) showed business confidence improved in the September quarter to a two-year high and that firms' hiring intentions were the strongest since 1973. Strong confidence in the construction, services and retail sectors added to steady manufacturing sector confidence and suggested annual GDP growth could head for 4.5% late in 2016 and early 2017 from 3.6% in the June quarter.

Normally such strong figures would raise concerns about inflation and be generating signs of pricing pressures and wage pressures that would prompt the Reserve Bank to hike the Official Cash Rate (OCR).

Instead, the survey showed a net 4% of respondents actually cut their prices in the September quarter when in the June quarter a net 11% had expected to increase prices during the September quarter. Just a net 1% increased their prices in the June quarter. The weakness in pricing intentions was despite a net 21% reporting their average costs rose in the quarter, up from 18% in the previous quarter.

This meant a net 1% reported lower profitability in the September quarter, although a net 20% expected improvements in profitability in the next quarter.

But the strongest indicator of what is happening around wages and jobs came with hiring intentions, which rose to a net 27% expecting to hire more people in the December quarter, up from a net 13% saying in the June quarter they would hire more people in the September quarter. This was the highest level since September 1973.

Actual hiring in the September quarter was not as strong as expected with a net 4% increasing staff, down from a net 10% increasing staff in the June quarter. This may suggest employers are looking for extra staff and unable to find them, and the survey questions about the ease of finding labour suggested that was the case -- with one interesting exception.

A net 41% of firms nationwide said they were finding it more difficult finding skilled labour, up from 39% in the previous quarter. A net 14% said they were finding it more difficult to find unskilled labour, up from 13% in the previous quarter.

More higher skilled migrants needed?

However, in Auckland, the survey found a net 21% reported problems finding unskilled labour, an improvement from 25% reporting problems in the previous quarter. Auckland employers were still having more problems finding skilled labour though, with the percentage reporting problems finding skilled labour rising to 47% from 43% in the quarter.

An NZIER chart correlating private sector wage growth and skilled labour shortages showed a significant gap opening up since 2013, with the skilled labour shortages suggesting wage growth should be closer to 4% than the less than 3% it is currently running at.

ANZ and NZIER both highlighted the role of low-skilled migration in Auckland as a factor, and the lack of higher-skilled migrants needed to meet the labour shortages. The Reserve Bank has also pointed to the strong net migration as a factor holding down wage growth and keeping inflation surprisingly weak, although the Government has denied seeing evidence this is occurring. Treasury and MBIE have also expressed concern about low-skilled migration suppressing wages and preventing people on benefits transitioning into work.

NZIER Economist Christina Leung said the shortage of skilled labour was particularly acute.

"The surge in net migration has expanded the labour force, but the increase in work visas have largely been for labourers, tradespeople and personal service workers," she said.

"That points to a mismatch over what New Zealand needs versus what is coming in," Bagrie said.

There was little market reaction to the QSBO, with economists seeing the Reserve Bank as on track to cut the OCR at least once more with its Monetary Policy Statement on November 10, with the potential for one more cut to 1.5% by the middle of next year. NZIER saw a trough of 1.5% in the middle of next year.

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Coming up...

The Reserve Bank said panel remarks by Assistant Governor John McDermott to macroeconomic policy meetings in Melbourne due later today on "Policy Uncertainty from a Central Bank Perspective" would be published on the RBNZ website at 6.30pm NZ time.